ECON 205 2nd Edition Lecture 3 Outline of Last Lecture I Opportunity cost economic cost the best forgone opportunity II Efficient market profit opportunity is eliminated instantaneously III Economic growth is it continuous process From the 13th century to present IV Supply and demand Outline of Current Lecture I Ceteris paribus other things remaining constant or the same II Markets coordinate the self interest of millions of people to achieve social goods the invisible hand does greed work III How about a command system or tampering with the laws of the market demand and supply IV The choice of alternatives tradeoffs production possibilities Current Lecture I Ceteris paribus states that when making economic models other things remain constant only one variable changes II The invisible hand dictates that the market is self regulating if left alone from outside influence laissez faire Adam Smith first described the invisible hand in his book The Wealth of Nations Individual greed the desire to maximize profits keeps the market at maximum efficiency If a firm does not operate to maximum efficiency consumers will use their dollars to vote the firm out of business Messing with the invisible hand Government intervention can lead one business to remain despite uncompetitive prices A monopoly when a firm controls a majority share of an industry s market can make the market inefficient and uncompetitive III Command economies are economies in which the government controls all modes of production and business Examples are Soviet Union Cuba North Korea The government can affect the economy in a mixed system having both elements of regulation and free market using fiscal and monetary policies The fiscal policy of government involves the power to tax and spend It is decided by the administration the White House and approved by Congress The monetary policy determines the supply of money and interest rates which affect investment in capital and interest sensitive spending The Federal Reserve headed currently by Ben Bernanke previously by Alan Greenspan decides it The market policy determines the market structure and promotes competition The international policy determines how the currency is regulated Supply and demand can be affected by government intervention subsidizing industries to make them cheaper and taxing others to make them more expensive cultural taboos sociopolitical conditions war and pollution etc IV The opportunity cost is the cost incurred by making one decision over another Going to college is an opportunity cost of all the years you could have worked instead of going to school The production possibility frontier PPF is a model that compares the production rates of two commodities that share the same factors of production i e land labor and capital I To determine the best choices we use a curve that relates the two to find a point where profit margins are the highest II When an economy is running at maximum efficiency it is running on its PPF curve When it is inefficient a k a almost all economies the point is inside the curve Thinking on the margin refers to maximizing profits through rational decision making and minimizing any opportunity cost